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Business Tax

Path Clearer to Finalizing Global Tax Deal, Yellen Tells Lawmakers

Joseph Boris  

Joseph Boris  

Poland is expected to drop its opposition to a global minimum tax on multinational corporations, clearing the way toward finalizing a broader deal on international taxation, Treasury Secretary Janet Yellen told the House of Representatives’ Ways and Means Committee on June 8.

Testifying before one of Congress’ two tax-writing panels, Yellen defended the deal, which was brokered through the Organization for Economic Cooperation and Development and has been signed by the U.S. and 140 other taxing jurisdictions. She expressed confidence that the Polish government, whose opposition has stalled progress toward issuing terms of the deal in the European Union, would soon join in.

“We’ve talked with Poland and I’m very hopeful that Poland will soon decide that it’s in their interest to agree to this,” Yellen told the committee at a hearing to discuss President Joe Biden’s proposed 2023 budget.

“I’ve tried to explain to their senior leadership that it is not only in the U.S. interest, but also in Poland’s interest, to reduce the prevalence of tax shelters around the world and it will help them compete better,” she added.

The provision of the OECD-led deal known as Pillar Two would require each participating country or territory to set a minimum domestic tax of at least 15% on profits of multinationals in its purview, though only companies with over €750 million ($804 million) in annual revenue would be affected. Pillar One, the deal’s other component, would reallocate taxing rights worldwide so that developing countries can capture more revenue from the digital economy.

Yellen, as she had done a day earlier in testifying before the Senate Finance Committee, defended the proposed global tax revamp in the face of Republican criticism that its provisions would make U.S. companies less competitive.

Rep. Kevin Brady of Texas, the committee’s ranking Republican, pressed Yellen to address the impact on domestic businesses from Pillar One, whereby some taxing authority would be reallocated from countries that host corporate headquarters, factories, and intellectual property. He suggested that the U.S. might lose tax revenue by ceding such authority.

Yellen didn’t say whether the Biden administration would quit the deal if it reduced U.S. revenue, but she pointed out that a full analysis by the Treasury Department of the deal’s revenue impact couldn’t be done until negotiations on Pillar One were completed.

“Our calculations do show that the impact is likely to be small, either way, positive or negative,” she said.

Concerns over possible hits to U.S. revenues and competitiveness from the OECD deal’s other provision, Pillar Two, were expressed by Republicans on the Senate Finance Committee when Yellen appeared there on June 7.

In response, the secretary said the impact on U.S. revenue would likely be minimal.

“We’re a very large market economy; we will gain revenue from our ability to tax foreign corporations that are doing business in the United States, where we consume those services,” Yellen testified. “We will lose some from revenue… that’s reallocated to foreign countries. Net, it could be positive or negative, depending on details that have not yet been worked out.”

Yellen also told the Senate panel that Treasury would work with Congress to ensure tax credits under the Code remain available to U.S. companies even with the global deal’s implementation.

Implementing Pillar Two, she said, would level the playing field for U.S. companies, as they already face a domestic minimum tax at home, under the global intangible low-taxed income (GILTI) regime enacted as part of the Tax Cuts and Jobs Act of 2017. Currently, GILTI imposes a 10.5% minimum tax on the foreign earnings of U.S.-headquartered multinationals, regardless of where they allocate profits; the rate is half the 21% statutory corporate income rate set by the TCJA.

Yellen and other administration officials have championed a multilateral agreement as a way to end a “race to the bottom” for corporate tax rates.

The secretary also told Republican senators she was open to working with them to address their concerns that regulations limiting which foreign countries’ taxes are eligible for the U.S. foreign tax credit (FTC) are potentially harmful and should be rescinded.

Several major U.S. corporations have said the final FTC regs, issued at the end of 2021 (TD 9959) and in effect since March, radically depart from established law and could deny the credit for many foreign taxes that have been creditable for decades.

While Yellen de?ected calls to delay or rescind the regs, she said it was possible that changes could be made and be retroactive.

Sen. James Lankford, Republican of Oklahoma, said during the hearing that American companies’ concerns about creditability under the FTC regs are similar to those regarding the value of some U.S. tax incentives under Pillar Two. He asked Yellen whether the FTC regs were going to be delayed or would they be implemented this year.

“I don’t think it will be delayed, but we will work to address issues with it,” Yellen told Lankford.

“We will look at any concrete suggestions that you have and work with you,” she told Sen. Rob Portman, an Ohio Republican. “We understand that there are concerns about these regulations. We certainly will revisit them and look at comments.”

Portman urged Yellen to adopt a one-year delay in implementing the regs, to give time “for notice and comment from American workers through American companies.”

 

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